(Bloomberg). — Hedge funds have been betting against one another in relation to software and internet stocks. This is despite the fact that there are a surprising number of targets for both bears and bulls.

A dozen or so technology firms appeared on Morgan Stanley’s list of the 50 “crowded longs” at the end of last month. The same companies, whose names the bank didn’t disclose, also made the prime brokerage’s list of “crowded shorts.” That’s an extreme overlap not seen since 2010 and illustrates the growing divergence in opinions on where the market’s one-time darlings will go from here. 

This split speaks also to the difficulty of choosing the right stocks in a period when economic prospects remain uncertain and the Federal Reserve is considering reducing its support for the pandemic. Tech innovations may lead to greater growth over the long-term, but stretched valuations have put the sector in the middle of an intense debate about inflation or interest rates.

“Either growth is scarce and I should own growth, which is the long side of the trade,” said Benjamin Dunn, president at Alpha Theory Advisors LLC. “Or growth is not so scarce, inflation is going higher, and the Fed is going to have to act more aggressively. Then I don’t want that exposure, and so I might want to be short.”

Just before the beginning of third-quarter earnings season, the divergence took place. Supply-chain disruptions and headwinds from Apple Inc (NASDAQ:).’s new limits on consumer data collection hurt profits at companies like Snap Inc (NYSE:). and Twitter Inc (NYSE:). In the meantime, Microsoft Corp (NASDAQ:).’s cloud-based software helped drive robust sales and profit growth, and Google’s parent Alphabet (NASDAQ:) Inc. reported revenue that topped Wall Street estimates.

It’s possible that some money managers have sussed out the brewing trouble, while others are willing to look past one or two bad quarters, said Dunn.

Morgan Stanley (NYSE:) noted that tech shares have seen the biggest increase in short sales among major industries this year — accounting for about half of their clients’ total additions. Partly driving the bearish tilt was the managers’ failure to deliver on the long side. 

According to the firm, the high overlap between the long and short crowded stocks is an indication of diversification which helped hedge funds fare better in recent stock crashes. From Oct. 4 to 5, the Alpha, which is the above-market return from stocks with the highest stock counts, was less that 1%. Comparable to the almost 3% drop in May’s similar selloff, this compares.

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